Will oil cause the next recession?

That was the debate I was having with few friends couple of days ago and I must say that algthough we did not all agreed I am pretty convinced that it will. In fact, a member of my family is out of work at the moment because he use to transport oil between South America as a middleman and his services are no longer required creating the first bankrupcy of the year that I know of. Hard to take but why pay someone in the middle when prices are so low by going direct. More margins are being made at the moment as very few companies share the benefits with the consumer. Only recently have supermarkets and airlines have started lowering their prices. Why? Officially because they bought their stock of petrol at a higher price as they secure deals many months ahead. The reality…PROFIT. Would I blame them, of course not.
Many forecasters believe consumers will spend the windfall, and thus boost the economy. But almost all of the savings from lower pump prices so far have been used to rebuild household assets and reduce debt. Consumers tend to increase their savings in tough times; they’ve been doing so during the six-year recovery.

Lower oil prices, however, could come with a downside. As they work their way through the system, deflation could follow. Already, 10 of the 34 largest economies in the world have seen year-over-year declines in consumer prices. The risk is that deflationary expectations could follow, encouraging consumers to withhold purchases in anticipation of even lower prices. If that is the case, excess capacity and inventory would build up rapidly and large quantities forcing price down.

Do you agree?

Benoit Mercier


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